MEMORANDUM
TO:
FROM:
RE: How to raise a Capital of $5Million for a LLC.
DATE:
Question Presented
What is the best strategy to raise a Capital of $5M from more than 35 investors for a LLC?
Discussion
There are various avenues of raising initial capital for your LLC. This Memorandum will probe the avenues for sourcing of funds for your LLC, and provide recommendations on the stratagem of choice.
1. Friends and Family
Friends and family are the first source of capital for many start-ups. Although the amount to be collected from friends and family largely depends on their financial status, the small donations may go a long way in providing the first step in establishing your start-up. In some cases, friends and family may offer interest-free loans. They may also make their contribution as gifts.
2. Crowd Funding
Crowd funding is another interesting avenue to raise funds for tour LLC. Crowd funding operates where you pitch your business idea and/or plan to a group of investors mostly in social media. You are expected to convince the investors that your business has potential for growth. Accordingly, the chances that an investor will be interested in your business depend on how effectively you pitch your idea. Crowd funding may help you attract future investors who may get interested in your business as it grows. Besides, you engage the investors themselves as opposed to using brokers who may defraud you.
Unfortunately, crowd funding has a major challenge. There is high competition because several businesses will be pitching their ideas to the same investors that you target. Accordingly, the high level of competition means that success in obtaining funding is not guaranteed.
3. Angel Investors/ Venture Capitalists
Angel investors are wealthy individuals who work to identify potential and brilliant start-ups to fund. It is worth noting that Angel Investors do not only stop at the funding. They go ahead to provide mentorship and business advice.
On the other hand, Venture Capitalists are more involved in making investments in big businesses. Accordingly, for your start-up to get Venture Capitalists’ funding, it has to show a high possibility of success. However, Venture Capitalists are motivated to get profit. Therefore, they will acquire a portion of your LLC in return to their investment.
4. Grants from the Government/NGOs
In this method, you will be required to submit your well-structured business plan to the government and/or NGO for approval. This method looks appealing and easy. However, its greatest disadvantages are that your business plan shall be subjected to thorough scrutiny, which shall make the process long and tedious. In the long run, the lengthy procedures may make you frustrated. Besides, there is also high competition for the funding since many start-ups apply for the grants.
5. Bank Loans
This is an easy avenue to raise start-up funds. You will obtain funding without giving up equity in your business. However, it is not advisable to obtain bank loans for your start-up because they come with very high interest rates. You must also present collateral to secure your loan. It follows; you may lose your property if you fail to settle the loan.
Strategies
After looking at the possible avenues to raise capital, this Memorandum next focuses on the strategy to raise the funds.
1. Seed Funding
Seed funding is the official stage for equity funding. Most entrepreneurs never go beyond this stage. Accordingly, seed funding helps the start-up obtain the funds that the business needs to get the business going with no expectation of seeking additional funds. Seed funding may obtain investors from various sources including, friends and families, Angel Investors, and Venture Capitalists.
2. Series A, B, C Funding
However, seed funding is limited in the amount of capital one can raise. In most cases, seed funding may raise between $10,000 to $2Million.
You may decide to source funds step by step in rounds as your LLC grows. Accordingly, each round of funding is different from the other and occurs in a different timeline.
Series A
Series A raises between $2Million to $15 Million. It follows; at this round, the investors look beyond the business idea and focus on the strength of the business’ success strategy.
In most cases, Series A are funded by Venture Capitalists. Angel Investors may not be very active in Series A stage compared to the Seed Funding Stage. It is worth noting that few businesses reach this stage because of the high level of expectations for growth in Series A.
Series B
Series B funding involves taking your business from the development stage. Here, your LLC begins to expand its market base. Therefore, in Series B, you seek funds to help your LLC meet the increasing demands. Funding in Series B may be between $33Million to $60 Million.
Series C
In Series C funding, the LLC has obtained much success in its operations. Therefore, the LLC may look for additional funding to develop new products and maybe acquire other small companies. At this stage, the venture is less risky and it therefore gets many investors.
3. IPO
At this stage of funding, the LLC has become so successful that it is now open for investments from the general public.
Rule 504 of Regulation D
Regulation D exempts from registration the offer and sale of up to $10 million of securities in a 12-month period. Accordingly, under Rule 504, your LLC is required to file a notice with the Commission on Form D within 15 days after the first sale of securities in the offering.
It is worth noting that some companies are not eligible to use Rule 504. These include Exchange Act reporting companies; investment companies; companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies; and companies that are disqualified under Rule 504’s “bad actor” disqualification provisions.
Accordingly, you may not rely on Rule 504 if your LLC is among the prohibited companies.
Rule 506(b)
Under Rule 506 b, you are exempt from the registration requirements of the Securities Act for unlimited size offerings. However, to qualify under this rule, the securities that you offer can only be bought by accredited investors and no more than thirty-five unaccredited investors. These unaccredited investors must also meet certain requirements, such being an officer of the company that is offering the securities. Besides, you are not allowed to solicit the securities, and you must reasonably believe that the investors purchasing the securities are accredited or are unaccredited investors who meet sophistication requirements.
Rule 506(c)
Under Rule 506(c) you may advertise your offerings as opposed to offerings in Rule 506(b). Accordingly, you may advertise through a variety of venues including the internet, television, seminars, email campaigns and hard mailers. However, under this Rule, you may only rely on accredited investors.
Recommendations and Conclusion
In light of the foregoing, you should begin at the Series A funding stage/round. The reason for this is that at Series A, you expect to get the $5Million Capital. Accordingly, you should work on your business strategy and make it very promising to attract potential investors.
In the choice of investors, I advise that you target friends and relatives, Angel Investors, and Venture Capitalists. You may also try Crowd Funding although it is not guaranteed due to its competitive nature. However, investors from Crowd Funding may note your business and fund you later as they monitor its growth. As your business grows, you may proceed to Series B, and so on.
Please note that Series A investors will receive common or preferred stock of the company, deferred stock, or deferred debt, or some combination of those.
In that regard, I advise you sell securities to the Investors. You may use Rule 504 of Regulation D to avoid the need to register your offerings. On whether to use Rule 506(b) or (c), I advise you rely on Rule 506(c) which allows you to advertise your offerings, which is not available in Rule 506(b). However, you may not be allowed to accept investments from unaccredited investors. That notwithstanding advertising will help you have a high chance in obtaining the accredited investors.
Regards
_______________
Name
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At Legal writing experts, we would be happy to assist in preparing any legal document you need. We are international lawyers and attorneys with significant experience in legal drafting, Commercial-Corporate practice and consulting. In the last few years, we have successfully undertaken similar assignments for clients from different jurisdictions. If given this opportunity, The LegalPen will be able to prepare the legal document within the shortest time possible. You can send us your quick enquiry ( here )
